• So far in this course, with the exception of predatory pricing, the courts have ruled that most low prices are considered competitive
    • An interesting instance where discounts can be anticompetitive is in bundled discounts
  • Consider the case of LePage Inc. v. 3M (2004)
    • 3M and LePage were competitors in the market for tape
    • As LePage’s market share grew, 3M started to bundle its tape with other unrelated products at a bundled discount (e.g. health care, auto care, etc.)
    • The bundle discount incentivized retailers to carry 3M tape products over LePage’s
    • Supreme Court: ``The defendant bears the burden of persuading the jury that its conduct was justified by any normal business purpose”

Anticompetitive Bundling Example

Consider a firm (A) that bundles the following three products:

Price Cost
Pencils $4.00 $2.00
Soap $6.00 $4.00
Keys $5.00 $2.00
  • Suppose a retailer sells all three products, and if the retailer buys 1,000 of each good, then the firm offers a 25% discount
  • TE stands for Total Expenditure \[ TE = 0.75(4, 000 + 6, 000 + 5, 000) = \$11, 250 \]
  • Suppose there exists another producer (B) of soap that can produce it at a cost of $3.00 \[ TE = 4, 000 + 3, 000 + 5, 000 = \$12, 000 \]
  • Thus, the bundle excluded an efficient firm from the market

Consider another example that bundles the following three products:

Price Cost
Toothpaste $4.00 $2.00
Mustard $3.00 $2.00
Bleach $5.00 $3.00
  • Suppose that the store needs 1000 units of each product
  • If the supplier A offers 20% discount for the bundle, the retailer’s total expenditures will be

\[ TE= 0.8(4000+3000+5000)=9600 \]

  • Suppose a rival bleach supplier wants to sell 1000 units to the store

  • Without the bundle and bleach supplied by another supplier, total expenditures of the retailer for the toothpaste and mustard will be \[ TE=4000+3000 = 7000 \]

  • To compete with the bundled product, the rival bleach supplier could charge no more than $2600, or $2.6 per unit

  • If the rival bleach supplier was equally efficient as firm A, the marginal cost of production would be $3.00

  • The equally efficient rival bleach supplier could be excluded as the maximum price that it could charge is below its cost

  • Multiproduct firm could raise price as a result of bundling the discounts

    • The specialty producers cannot compete because their sales will be unprofitable
    • If the products in a bundle were to sold separately with 20percent discount spread evenly across each product, it would mean $3.20, $2.40, $4.00 for the three products
    • In that case the specialty producers can be profitable